The writer is a former vice-president of the World Bank and a former caretaker finance minister of Pakistan

The decision on November 2 by the Pakistani cabinet to grant the ‘Most Favoured Nation’ (MFN) status to India in matters pertaining to trade is a tectonic shift in the country’s relations with its large neighbour. India awarded the MFN status to Pakistan in 1996 soon after joining the World Trade Organisation. Pakistan was also obliged to give to all members of WTO — and that included India — the same status. But Islamabad refused to act, in the mistaken belief that it could use it as a lever to get concessions from New Delhi on Kashmir. As most economists have argued, improving trade and economic relations with India would bring greater benefits to Pakistan, the smaller of the two economies, than to India. If trade were to be used as a lever, India has greater power than its neighbour, Pakistan.

The Pakistani decision concerning the grant of MFN status was received with enthusiasm by the Indian leadership. Anand Sharma, India’s commerce minister, hailed it as part of a “paradigm shift” and said that New Delhi “deeply appreciated” the move. It will be beneficial for both countries, he said. Pakistan’s initiative had the support of its powerful military which had continued to look at India with suspicion. The Pakistani military’s approval was implied by Firdous Ashiq Awan, Pakistan’s information minister in announcing the cabinet’s decision. “This was decision was taken in the national interest and all stakeholders, including our defence institutions were on board” she told the press.

The business community on both sides of the border applauded the move. Many believed that there will be almost immediate benefits in terms of reducing the transaction costs of doing business between the two countries. The Federation of Indian Export Organisations estimated that trade between the two nations could double from current levels of about $2.7 billion a year simply by the rerouting of goods currently sent via Dubai and through some other channels. But according to one newspaper report, “the Confederation of Indian Industry cautioned that road blocks such as stringent visa rules, non-tariff barriers and communication problems still need to be dismantled and more trade routes opened up” for full benefits to be realised.

But the real significance in this breakthrough will go much beyond increasing India-Pakistan trade. It will provide foreign policymaking in Pakistan with a new base, moving the country away from total preoccupation with the United States. At this time, relations with America have become highly strained. Improving relations with India will certainly help to place the dealings with Washington in a new context. Although the ground on which Pakistan has sought to structure its relations with the United States over the past six decades has continuously moved, it always included concerns about India.

Pakistan got close to America as a part of its effort to build its defences to protect itself from the threat it then perceived was posed by India. That was essentially the reason why Ayub Khan, first as defence minister and later as the country’s president, negotiated a series of defence agreements with the US. Pakistan bound itself in arrangements that covered a wide geographic front, stretching from the Mediterranean to the Pacific. Good relations with Washington also brought economic help to the country at the time Pakistan was attempting to speed up the rate of economic growth. That was a by-product, not the real motivation behind the effort to get close to Washington.

Later, during the presidency of General Ziaul Haq, while economic assistance from the US became the main motive for association with Washington, concern with India remained at the back of the policymakers’ mind. Both economic considerations and the need to strengthen its defences against India were the reason why Zia famously turned down the offer of help by President Jimmy Carter in return for Islamabad’s assistance to throw the Soviet Union out of Afghanistan. He famously called the American offer “peanuts”. Islamabad wanted more from the US than Carter’s America was prepared to give. Carter’s defeat in the elections of 1979 brought Ronald Reagan to power in Washington. The new head of the American state was prepared to do much more than his predecessor to destroy what he called the “evil empire”, the Soviet Union. Pakistan’s willingness to align itself with America to achieve this objective was welcome news in Washington. In return for Islamabad’s support to expel the Soviet Union from Afghanistan, America was prepared to provide copious amount of military and economic help.

By becoming a member of the American alliances in the 1950s and the 1960s, Pakistan was making a hypothetical commitment. It would support the US in any activity directed to stop the advance of communism in Asia and the Middle East. However, in the 1980s, association with the US meant providing active support in a military campaign — the one fought by the US in Afghanistan with the help of a number of proxies. This change produced a new dynamics in Pakistan’s situation. It shifted focus to Afghanistan in the making of policy and, at the same time, the country had to contend with many unanticipated consequences, being an active player in a battlefield close at hand. Among the latter were the rise of Islamic extremism in the country, weaponisation of Pakistani society and culture and ethnic conflict between some of the communities in the country. The large-scale migration of Afghans to Pakistan was to increase the Pashtun population in Karachi. The consequence of this particular development is still being felt in Pakistan’s largest city.

While the persisting concern with India was at the base of Pakistan’s Afghan policy, the entry of Afghanistan as a variable in the making of policy was to acquire increasing significance after the terrorist attacks on the US. Under General Pervez Musharraf and, after his departure, under the successor civilian government, curbing the rise of Islamic extremism and international terrorism associated with it became the basis of relations with the US.

However, with the easing of tensions with India, relations with the larger neighbour will become less of a factor in the crafting of foreign policy. A different kind of relationship with India would introduce a new variable in the way Pakistan looks at the world outside its borders. This will affect the country’s relations with the US as well.

As an Indian, I hope and pray that Pakistan doesn’t give MFN status to INDIA.
Simply because it brings more advantage to Pakistan than it does to India.
It satisfies EU condition for Pakistan but brings very little benefit for Indian exports.
As it is lot of Indian goods enters Pakistan via Dubai.

It has always been Pakistan’s anti-India obsession in everything that they did that has caused all the trouble these last 64 years and if there is a shift this could be the silver lining in an otherwise dark cloud of Pakistan’s future

Good analysis. There will be troubles along the way as we have too much history between us. I would like to see Pakistan moving away from the US! Once we have economic interests, no one will be able to derail the peace process (as money talks loud!!)

Author has not pointed out that Pakistan is a major nuclear power, and both America and China will continue to support us economically as well as politically, since a unstable Pakistan will not be in the world’s interest. The world’s powers will continue to give aid. We don’t need India.

All this rhetorical benefit of free trade is well and good, but as an economist I expected you to go into some details about how Pakistan will accrue benefits. Won’t Pakistani industry be at a severe disadvantage at this current stage with a flight of capital due to terrorism and lack of electricity?

These are the questions that many ordinary Pakistanis worry about, aside from the diplomatic advantages. As an economist you need to explain to the people the what tangible advantages and disadvantages this status has the potential to bring.

@spacedoutwriting : The reason why other countries aren’t not following this strategy is because all the other nuclear power are developed and do not need aid (other than India, which is developing but not dependent on aid). Somalia too would get aid if it had nukes, but they don’t know how to make them. Pakistan was not on the international stage till we had nukes. As long as our nukes are safe, we will be fed and looked after. I’m afraid that’s how the world is, and it is fair that we take advantage of our position.

@andleeb:
“Author has not pointed out that Pakistan is a major nuclear power, and both America and China will continue to support us economically as well as politically, since a unstable Pakistan will not be in the world’s interest.”

Dream on buddy. China has never supported you economucally – only mititarily and it did that even when Pakistan was not nuclear. During flood of both years China gave a total of $5 million.

Where US is concerned, it always gave aid in return for soldiers on rent from Pakistan. This was true even before Pakistan went nuclear and is true even now.

“Pakistan was not on the international stage till we had nukes. As long as our nukes are safe, we will be fed and looked after”.

Between 1998 May when Pakistan went nuclear and 9/11, sever sanctions were put by US and all Western nations on both India and Pakistan. SO there goes your theory that as long as Pak has nukes US will continue to give aid. Because it would not have imposed sanction in 1998 May in that case.

@andleeb – I always believed a person with self respect would not accept handouts from others but empower himself through hard work to sustain himself. The same logic applies for countries too. Why beg ? Why threaten someone to help coz u’ve got nukes.How demeaning.The world will never respect pakistan if this is the attitude of its people.Why be a parasite ?

@andaleeb – but why should we ask for charity ? why cant we develop ourselves ? how long will the world help us ? would you be okay if your hard earned tax money was used to feed someone in zambia ? i think not. It is not the responsibility of the world to feed the poor of pakistan. If we can’t feed ourselves we should not be giving birth to any more children in pakistan.And you want to threaten the world into helping us coz we’ve got nuclear weapons. SHAMEFUL. why cant u instead want pakistan to be self dependent. This mentality will ensure that we never prosper n develop.

I do not agree with the author. The conclusions that he has drawn is exactly the conclusions that Pakistan want others to draw of this. Pakistani Foreign Policymakers will like the world to believe that Pakistan will change from here on to become more responsible and mature. This feeling then can be used to influence the increasingly stubborn position that the international community is taking towards Pakistan. Pakistan is diplomatically getting cornered in the inernational arena. This move mainly aims at the international community to make them soft and less hawkish.
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Giving MFN status to India was a Pakistani promise that they fulfilled after long delay. This was a part of their commitment for being a WTO member. They delayed it because they thought that this can be used as a bargaining chip against India on Kashmir. That was a wrong assessment of the situation. Now they absolutely need this so that they can distribute their import dependence which is a strategic risk. Pakistan runs a huge trade deficit with China. Their trade with USA is a bit more balanced but still bad. The fact that there is no disastrous current account deficit is because of the huge remittances from Pakistanis who work abroad. For a country which does not produce anything unique to balance its strategic import dependence, the best strategy is to diversify the imports. This they should have done much earlier. However they are so blindly anti-India they they loose sight of their own interests as well. Now that they are suffering for their huge dependence on US that they have realised that how great an enemy India may be, neither USA nor China are friends truely. Struck by USA and the NATO countries Pakistan went to China. Nothing came out. Then they went to Saudi Arabia and the middle east. Nothing much came out from there as well. Mr Zardari even went to Russia. They also went to Turkey may be to reach to the European countries. Atlast when they realised that every country functions on its own national interests only that they realised that MFN to India is in there interest. Implementing MFN with India will increase some business across the border, bring some more employment, generate some more tax collection and diversify the risk of importing too much from USA, West and China. With time as India grows Pakistan may perhaps also diversify the risk of too much dependence for export to USA and the West. India has very little to gain except for some business. The Indian enthusiasm is on the expectation of a brotherly Pakistan in future. This, i think , is not going to happen. Pakistan will always remain anti-India and an enemy.